Fixing the Big Banks

The focus of the current economic fear has returned to the nation’s biggest banks. Financial institutions including Citigroup and Bank of America are in deep trouble and urgently need help. But just handing them billions is not doing the job.

Until a week or so ago, government officials had barely uttered the word “nationalization,” a scary word to many if not most Americans. A growing insiders’ debate took off last week, when Democratic Sen. Christopher Dodd, conservative Republican Sen. Lindsey Graham and former Federal Reserve Chairman Alan Greenspan all suggested that major lenders might have to be nationalized.

President Obama himself made the case for drastic action: “What got us into this mess initially were banks taking exorbitant, wild risks with other people’s monies based on shaky assets. And because of the enormous leverage where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system.”

In the “stress tests” soon to begin, federal agents will be scouring the books of 20 of the biggest banks to see exactly how toxic are their toxic assets. Some mainline economists already class some of the institutions as “walking dead” or “zombie banks.” A key question is whether the institutions have enough money to make it through a worsening recession. The test results could be an opener for additional infusions of government money. Or the government could take direct ownership stakes when deemed necessary by acquiring common shares with voting rights.

Temporary federal takeover may not be called nationalization. Some suggest “temporary receivership” or the farfetched “preprivatization.” But whatever its name, people will know it as nationalization, and many will hate it, fearing that it will become permanent and that it may spread to the banks where they do business.

Worst of all is the fear that the federal government won’t be capable of running any big enterprise, much less a big bank. This is nonsense. The feds do a good job running the Army and Navy, the mail service and Medicare. And when it comes to banking, they did a good, if expensive, job of running the collapsed savings and loans in the 1980s. And they seized the Pasadena-based IndyMac Bank in July, operated it, and are looking for a private buyer.

We are likely to see temporary nationalization of one or more of the biggest financial houses before long. If that happens, it will be because that is the least bad of the bad alternatives.

In this steadily worsening recession, we should get used to the new terminology like temporary nationalization and “depression” — the conceivable fate that these actions are intended to head off.